Dynamics of cluster formation for Tech Start-Ups

Many business ventures have started in the basement. They had to go through the entire process of learning how to carry out a business. There are others who are spared the trouble. These entrepreneurs were blessed by being part of a cluster. Since this kind of activity happens predominantly in Technology business they are known as Tech clusters.

What really happens in a Tech cluster is that we have a granddaddy company or a tech school which has hit upon a great tech idea. Creating actual business from an idea has considerable gestation period and business risks. The situation spawns a community of entrepreneurs who lean against each other to collaborate on the tech but run their businesses individually and may compliment or compete with each other.

Introducing Brett Gilbert who studies cluster formation

Brett Gilbert is an associate professor in Rutgers University’s Management and Global Business Department. The article is based on an interview with Ms Brett Gilbert. She was involved in studying tech cluster formation in South Africa recently and has given her a lot of insight into the subject in the context of emerging markets.

How do Tech Clusters Form?

The idea of cluster formation is based on the premise that businesses spawn in a particular geographical location when they get inspiration and support from a particular patron like a Business Major or a University which is working on some state-of-art technology and was eager to see its work get transferred into products in the market. Two examples are given below.

Stanford University and Silicon Valley

The spearhead research in Stanford University has been responsible for the build up of start-ups in the Silicon Valley long ago and today it is a powerhouse of activity.

Microsoft and Seattle

This is the case where a company Microsoft was responsible for starting a tech cluster. Microsoft provided support to start-ups as it wanted products based on its technology. Soon there was a proliferation of tech companies developing software and allied products and services in Seattle.

Incubation Services for Tech Clusters

The cluster formation cases mentioned above were involuntary and self sustained efforts. The experience led to formation of a policy in public domain to set up incubation facilities for tech startups which lead to formation of a tech cluster. Such facilities are usually provided by universities or local business promotion bodies.

Incubation facilities in South Africa

South Africa has taken two initiatives in the hope to pave a path towards cluster formation. They have also appointed an official to nurture the process.

Incubation Facilities for start-ups

South African government is trying to use the concept of using incubation facilities to form tech clusters and spur economic growth. It is in the initial phases. They just started making efforts by helping start-ups with office space, guidance and services so that they can concentrate on tech rather than business procedures.

Mandatory contributions to start-ups for Multinationals

South Africa does not have top class academic support neither does it have indigenous business with cutting edge technology. It has to rely on multinationals who have set-up business in South Africa. In this regard they have taken a positive step by legislating that multinationals have to contribute back by helping small and medium enterprise-sized enterprises.

Venture Capital and Tech Clusters

Venture Companies do not like to venture far away from their geographical vicinity to finance start-ups. To germinate cluster formation there has to be a bit of financing from private or public sources for seed money and strong entrepreneurship. Venture capitalist start peeking in once those two inputs start feeding off each other.

Challenges to Cluster formation in South Africa

The current government in South Africa is pushing enterprise to gain from the economic development. However some of the changes in legislation have proved to be a damper for employed persons to leave their jobs and involve themselves in a start-up. The post-apartheid employment policies have made job reservations for black citizens. As the upper layer workforce is predominantly white, a position vacated by a white goes to a black making the white unemployable. The black on the other hand have just started to enjoy the luxury of a permanent job and middle class lifestyle and do not want to take risks in engaging themselves in start-ups.

Start-ups are a great source for knowledge about the latest trends in tech.

They help in job creation down the line

Greater economic activity

Disadvantages

Clusters often concentrate on a same technology. This is akin to putting to all eggs in a basket

The cluster-ecology stifles innovation as everyone keeps their focus on the same technology.

If the cluster is dependent on a tech major, they sink and swim with the major.

Clusters who are trying to introduce disruptive technologies may find stiff resistance from businesses that are affected from their enterprises. It may be better to work off-cluster.

The advantages and disadvantages of cluster formation stay the same in case of emerging countries. Kenya has proven cases of success in cluster formation. Local enterprise with patronage from multinationals are a good risk free testing grounds for multinationals who want to break into a country with new products and services.